Guide to Refinancing an FHA Loan Into a Conventional Loan
FHA loans are a popular choice for many homebuyers. They require a minimal down payment, have lenient requirements, and often have more favorable interest rates. Unfortunately, the fees you’ll pay over the life of your loan can make you quickly consider refinancing.
If you want to lower your monthly mortgage payment, you might consider refinancing an FHA loan to a conventional loan. However, before you get started, it’s important to understand if this is the right move.
Keep reading as we explore everything you need to know when refinancing an FHA to a conventional loan.
The exact process for refinancing FHA to conventional loans depends on your current loan and lender. However, the following process provides a good overview of what to expect.
Before starting any mortgage refinance, it’s important to define your reasoning. Are you hoping to access some of the equity in your home to complete a home improvement project? Do you want to eliminate mortgage insurance? Or have mortgage rates dropped, and you want to take advantage?
Understanding your reasoning helps you to know if you’re making the best financial decision.
Once you have your goals defined, you can start researching lenders. If your experience with your current lender has been positive, you can start there. They might be able to offer you a better rate since a relationship already exists. Then, pick a few more lenders you want to consider as well.
When comparing lenders, it’s essential to look at their interest rates and APR, which includes any fees associated with the loan. By understanding the costs of borrowing with each lender, you can make the best financial decision.
Once you’ve found a lender to move forward with, get all your documents together, including your pay stubs, W-2s, previous tax returns, and any bank or investment statements. Having these documents available before you start the application will help speed up the process.
After you’ve picked a lender you want to move forward with, you’ll fill out an application. The lender will then begin the underwriting process.
In addition to requesting the documents you’ve already put together, they will do a deep dive into your financials, including a hard pull on your credit report to understand your credit score and how much debt you carry month to month. They’ll also want to learn more about the home you’re refinancing by having a home appraisal completed.
Don’t be surprised if questions arise during the underwriting process. Respond promptly and provide additional documentation if requested to help avoid any potential delays in closing.
The final step is closing on your new loan. Here, you’ll sign all the required documents and pay the closing costs unless they are rolled into your new loan.
There are many reasons someone might consider refinancing from an FHA to a conventional loan. However, the decision usually comes down to the financials and the ability to reduce their monthly mortgage payment.
Here are a few of the most common reasons people choose to move from an FHA to a conventional loan.
In most cases, you must pay mortgage insurance premiums with an FHA loan. The monthly premium depends on several factors, but most people pay 0.55% of their loan amount. Over the life of the loan, this is a substantial amount of money.
By refinancing to a conventional loan, you can eliminate mortgage insurance as long as your loan-to-value ratio (LTV) is less than 80%. This can help you save a significant amount of money every month.
However, if you have an LTV above 80%, meaning you have less than 20% equity in the home, you’ll be required to have private mortgage insurance (PMI) with a conventional loan. In a situation like this, it could make more sense to utilize an FHA Streamline Refinance, which reduces the paperwork needed and, in most cases, doesn’t require an appraisal.
If your credit score has improved since you first took out your mortgage, you could refinance and take advantage of lower rates. This will help reduce your monthly payment and the total interest you’ll pay over the life of your loan.
Refinancing your loan provides you with the chance to change your loan terms. Moving from a 30-year loan to a 15-year loan would cut down the time it takes to pay off your home. The result would be a higher monthly payment but less interest paid over the life of your loan.
While accessing cash from your home with an FHA cash-out refinance is possible, you’ll still be required to pay for mortgage insurance. Instead, you could use a conventional cash-out refinance and access up to 80% of your home equity without being required to have PMI.
Conventional loans have different requirements than FHA loans. If you’re looking to refi from FHA to a conventional loan, you’ll want to ensure you meet the requirements before moving forward. Here are some things to be aware of:
Before refinancing your mortgage, the two most important things to understand are the costs and whether the savings will be worth it.
So, how much does refinancing an FHA to a conventional loan cost? While the cost can fluctuate from lender to lender, it’s typically anywhere from 2% to 6% of the loan amount. If you borrow $300,000, the closing costs could be anywhere from $6,000 to $18,000.
While closing costs can be expensive, it’s important to keep in mind that as long as you have at least 20% equity in your home, you can eliminate mortgage insurance by refinancing from an FHA to a conventional loan, including the 1.75% Upfront Mortgage Insurance Premium required with all FHA loans.
Before proceeding with refinancing, it’s important to understand your breakeven point, or the time it will take for the savings to equal the costs.
For example, let’s assume you plan to refinance your mortgage, and the closing costs will be $7,500. By refinancing, you’ll eliminate your $150 monthly mortgage insurance payment and save an additional $150 per month because you qualify for a lower interest rate.
Because your total monthly savings will be $300, your breakeven point would be 25 months, meaning it would take 25 months before the savings from refinancing outweigh the costs.
Typically, when you refinance an FHA loan with another FHA loan, you’ll need to wait anywhere from 210 days to 12 months. This is not the case when refinancing an FHA loan with a conventional loan. Instead, you can refinance as soon as you meet the lender's requirements.
However, it’s important to consider both the cost and benefits of refinancing. Just because it’s possible to refinance, you must ensure it will help you save money.
When refinancing from an FHA to a conventional loan, you need to consider many factors to determine whether this is the right financial move. While we’ve already covered many of the benefits you can experience, let’s look at some of the risks.
